As Long As The Music Is Playing

Credit Suisse reports that through last week there have been $320 billion in announced share repurchases in 2013. For reference announced repurchases  for the entire year of 2012 were $477 billion and 2012 was a strong year for repurchases. At the current pace there will be well over $800 billion in announced share repurchases in 2013. If indeed corporations repurchase that much stock it would amount to over $3 billion every trading day. I don't believe that corporations will be able to keep up the current pace but even at a somewhat more moderate pace these numbers are astounding.

In the short run a steady buyer of billions of dollars of shares a day cannot be painted any way other than extremely bullish. In the bigger picture this is creating valuations that are unsustainable and will eventually lead to the third reckoning since the new millennium.

Many point to the record cash on the balance sheets of US corporations as justification for the current binge. They ignore the other side of the balance sheet where debt has soared by far more than cash. JPMorgan reports that net debt at corporations ex-autos is at a record of over $1.9 trillion up from under $1.2 trillion at the beginning of 2007.

The S&P 500 is currently trading somewhere between 15 and 16 times forward earnings, well above the historical average. One can also argue that the earnings number is being artificially inflated by low interest costs and an economy artificially propped up by zero rates. However, there is nothing easily identifiable on the horizon that will derail the current share repurchase binge. All this places us squarely in a third game of musical chairs where the music is still playing.

3 comments:

AH said...

Great points, did you square these numbers with new offerings (secondary+primary+insider net selling?). I know they are also running at historic levels, not sure what the net is, and the net is all that matters from an offer/demand perspective.

I think the point you are making on how quickly balance sheets are being depleted, at a time of peak margins, is a key one. One that is being overlooked by many. Including the Fed.

Thanks for the post

Tsachy Mishal said...

Trim Tabs has a very expensive subscription service that tracks the net of these. I do not subscribe to it. I check weekly on the list of secondaries and IPOs in the market data section of the journal. I also follow a number of insider trading reports. When the market has a nice run you always see more issuance and insider selling. It does not appear to me to be especially high right now and I have been following these numbers closely for nearly ten years.

theakeman2 said...

Keep dancing to this music. I agree, it could end fast - http://modeltstocktrends.blogspot.com/2013/04/were-dancing-until-music-stops.html